To reconcile inventory, start from the records quantity, correct it for explained items that were not recorded, and compare the result with the physical count. Any remaining shortage or surplus is investigated, not hidden. The counted quantity then gives closing inventory.
This lesson completes inventory and cost of sales. It uses the same habit as the bank reconciliation walkthrough: explain each difference separately before deciding the final figure.
Why would the count and the records differ?
The records are built from transactions: opening quantity, plus purchases, less sales. They assume every movement was recorded. The count tests that assumption.
Some differences are recording gaps, such as a customer return not yet entered. Others are real losses, such as damaged goods or theft. A third type is the owner taking goods for personal use, which is not an expense but drawings.
How to reconcile, step by step
- Work out the records quantity: opening + purchases − sales.
- Adjust for unrecorded movements that are confirmed (returns inwards, returns outwards).
- Compare with the physical count and find the shortage or surplus.
- Explain each part of the difference: damaged, owner’s use, unexplained.
- Value the count at cost (or NRV where lower) to find closing inventory.
- Record the owner’s goods as drawings, and let the remaining losses fall into cost of sales.
Worked example
Kedai Buku Teratai holds notebooks that cost RM 6 each. At 31 December 2025 the records show: opening 120 units, purchases 800, sales 760. The physical count is 148 units.
Step 1, records quantity: 120 + 800 − 760 = 160 units.
Step 2, adjustment: 8 units were returned by a customer on 30 December, and the return was not yet entered. The records should be 160 + 8 = 168 units.
Step 3, shortage: 168 − 148 = 20 units.
Step 4, explanation: 6 units were damaged and thrown away, 4 were taken by the owner for personal use, and 10 are unexplained. Check: 6 + 4 + 10 = 20.
Step 5, value: closing inventory is 148 × 6 = RM 888. As a check, 168 × 6 = 1,008 and 20 × 6 = 120 give 1,008 − 120 = 888.
Step 6, treatment: the units lost in the gap are RM 120 in total (damaged RM 36, owner’s use RM 24, unexplained RM 60). Using RM 888 as closing inventory puts all RM 120 into cost of sales. The owner’s goods (RM 24) do not belong there, so debit Drawings RM 24 and credit Purchases RM 24.
The mistake to watch for
A common slip is to force the count to equal the records.
Mistaken working: closing inventory = 160 × 6 = RM 960
The student trusted the records, ignored the return, and assumed the missing units would turn up.
This overstates closing inventory by RM 960 − RM 888 = RM 72, so profit is overstated by RM 72 as well. It also hides a shortage that management should investigate. The count is evidence of what exists, and the records are what you test against it.
Check yourself
1. Opening inventory is 50 units, purchases 300 units and sales 280 units. What quantity should the records show?
Show answer
50 + 300 − 280 = 70 units.
2. The count for the same item is 64 units and the cost is RM 15 per unit. How many units are missing, and what is their cost?
Show answer
70 − 64 = 6 units. 6 × 15 = RM 90.
3. Of the 6 missing units, 2 were damaged and 1 was taken by the owner. How many are unexplained, and what is the cost of the unexplained units?
Show answer
6 − 2 − 1 = 3 units. 3 × 15 = RM 45. The owner’s unit (RM 15) is drawings, and the damaged and unexplained units (RM 75 together) stay in cost of sales.
Where this leads next
Try the whole set together in the inventory and cost of sales practice set. If you want to log slips for later review, use the mistake log and retest queue.
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